Session Wrap — 05.08.26
Desk notes on macro, rates and FX.
Elevator Pitch
Today’s session was quiet. There wasn’t a lot of interesting news out there. The most interesting thing, as far as I know at this point, was the overall strength in the ISM PMIs.
Yes, I know the headline slightly missed consensus, but who cares about the headline when New Orders (which leads the headline by about two to three months) came in notably stronger.
Macro Update
US ADP employment change for July disappointed at 44k against a 70k consensus, a sharp deceleration from 98k prior. On wages, the median change in annual pay for job stayers held steady at 4.4%, while job changers saw pay growth accelerate to 7.0% from 6.6% prior.
ISM Services PMI for July came in just below consensus at 54.1 versus 54.5 expected, though still up from 54.0 prior. Beneath the headline, New Orders jumped to 57.2 from 55.1, and Prices rose to 70.3 from 67.7, both pointing to underlying strength and continued price pressure. Employment, however, fell sharply to 47.4 from 51.2, back into contraction.
EU PPI for June came in exactly in line at 4.6% YoY, a sharp deceleration from 5.9% prior, with the monthly figure at -0.3% against a -0.2% consensus.
Japanese Average Cash Earnings for June rose 3.4% YoY, in line with expectations and up from 3.2% prior. UK New Car Sales for July accelerated to 11.7% YoY from 11.4%.
New Zealand’s labour market data was mixed. The Labour Cost Index rose 0.7% QoQ against a 0.6% consensus, with the YoY figure at 2.1% versus 2.0% prior. However, the Unemployment Rate ticked up to 5.6%, above the 5.4% consensus and up from 5.3% prior, even as Employment Change for Q2 beat significantly at 0.5% QoQ against a 0.1% consensus.
Chinese RatingDog Services PMI for July missed notably at 50.4 against a 53.7 consensus, down sharply from 54.1 prior, dragging the Composite PMI down to 50.8 from 53.6.
Central Bank Guidance
Federal Reserve: Schmid said tight monetary policy is needed to bring inflation back to the 2% target, describing current inflation as too high and worrisome. He noted the current stance of Fed policy is not restrictive, and that recent relief on energy prices may prove temporary. He said the economy is performing well overall with resilient growth, and while he welcomes the recent inflation data, it’s too soon to say whether it reflects genuine easing. He argued the PCE price index remains the best measure of inflation, and that the Fed shouldn’t ignore inflation even when driven by a supply shock, noting the job market appears roughly balanced while AI-related investment is contributing to inflationary pressure that shouldn’t be overlooked.
Kashkari, speaking to CNBC, admitted he was genuinely undecided between voting for a hold or a hike heading into the FOMC meeting. He said now is the time to start slowly moving rates up, framing the objective as bringing inflation to target rather than deliberately slowing the economy. He noted the economy today is far healthier than in the 1970s, and clarified he isn’t calling for a dramatic rate increase, just continued work to get inflation back to target, preferring small incremental steps over waiting. On communication, he said a clear reaction function is valuable for market participants, and that there’s no “magic number” for how many meetings the Fed holds each year, noting an emergency meeting could be called if needed. He described himself as open minded without a strong fixed view.
Bank of Japan: The minutes from the June meeting showed most members share the view that the economy is moving in line with the baseline scenario, alongside risks that underlying inflation could overshoot the 2% target. Members agreed it was appropriate to continue raising rates, with some stressing the importance of maintaining guidance that further hikes would follow if the economy and prices continue moving in line with forecasts. One member flagged that FX factors are pushing up import prices and hurting smaller firms, while another noted Japan’s real interest rate remains exceptionally low by global standards and needs adjustment given upside inflation risk. On the balance sheet, a few members said debate around bond tapering is shifting from the size of purchases toward the duration of JGBs being bought, and clarified that the decision to pause tapering was aimed at avoiding bond market instability rather than accommodating fiscal policy. As a reminder, the BoJ hiked 25bps to 1.00% at that June meeting by a 7-1 vote, the highest level in 31 years, with dissent from board member Asada. These minutes are largely stale at this point given the more recent July meeting, where the Bank held rates unchanged as widely expected.
Geopolitics
Strait of Hormuz: Draft Deal Terms and Timeline
The US is reportedly nearing a Hormuz deal, with an announcement targeted for Wednesday. Under the draft terms, all inbound ship traffic through the strait would use a northern lane through Iranian waters, while outbound traffic into the Arabian Sea would use a southern lane through Omani waters in coordination with Iran. No tolls would apply during an initial 60-day period, with naval mine clearance in the median lane targeted within 30 days, after which that lane would be used under a permanent Oman-Iran arrangement. Trump stated the US had “a very good day” with Iran following all-day negotiations, and said there is “plenty of time” to reach an agreement. A Gulf official told CNN there is roughly a 50/50 chance of a deal by Friday, noting the Iranian delegation currently present does not include the IRGC, whose sign-off would be required for any provisional agreement.
Iran-Oman Understanding: Status and Approval Process
Regional officials indicated the draft agreed by Iranian and Omani negotiators awaits final approval from Iran’s Supreme Leader, describing it as a temporary solution tied to the collapsed June US-Iran agreement, with a potential deal paving the way for resumed US-Iran negotiations on Tehran’s nuclear program. A senior diplomatic source said only one or two issues remain unresolved in the Iran-Oman talks. Iran’s Foreign Ministry stated the geographic characteristics of the route have been agreed, and that a joint Oman-Iran announcement is in its final review and drafting stage, provided unspecified third parties don’t interfere.
Iran’s Deputy Foreign Minister: Clarifications on Scope
Iran’s Deputy Foreign Minister clarified that the understanding with Oman does not equate to a full reopening of the Strait, explaining that implementation would close existing temporary routes near Lark Island and in Oman’s internal waters in favour of a new route expected to last two to four months or longer, with the understanding reached solely between Iran and Oman without foreign interference. He said moving to a second phase would require a fresh Iranian decision on whether the US is genuinely prepared to return to its commitments under the Islamabad MOU, noting Iran has received US messages suggesting such readiness, though no direct talks have occurred in recent days. He added that the US had itself violated the Islamabad MOU by lifting the naval blockade and restarting the war, and that the Lebanon situation remains unresolved.
US Sanctions Policy on Iran
The US removed select Iran-related sanctions, including on certain previously sanctioned airlines. A US Treasury official clarified this does not indicate any broader shift in US policy toward the Iranian government.
Regional Diplomatic Movements
Pakistani PM Sharif and Army Chief Munir are reportedly set to visit Saudi Arabia as part of regional diplomatic efforts focused on reducing tension and addressing the security situation. Separately, Israel issued evacuation orders for residents of towns in southern Lebanon.
US Treasury Q3 Refunding Announcement
The Treasury’s Q3 Quarterly Refunding Announcement reiterated it expects to maintain nominal coupon and FRN auction sizes for at least the next several quarters, keeping 2, 3, 5, and 7-year note sizes unchanged for August through October, alongside unchanged 10, 20, and 30-year sizes and TIPS auction sizes. Treasury assumed a $950 billion end-September cash balance, with the TGA peaking at $1.05 trillion (plus or minus $50 billion) in late October, up from a prior $900 billion end-June assumption and $1 trillion peak estimate. Quarterly buyback caps were kept unchanged at up to $38 billion for liquidity support and $25 billion for cash management. Upcoming auctions include $58 billion of 3-year notes on August 11th, $42 billion of 10-year notes on August 12th, and $25 billion of 30-year bonds on August 13th, all settling August 17th. TBAC minutes indicated dealers generally expect nominal coupon auction sizes to next increase sometime in 2027, later than the previously expected “early 2027,” with the Committee continuing to view increases in coupon issuance as potentially warranted in FY2027.
Cross-Asset Snapshot
Gold Spot 4.2% stronger at 4250
US 02s10s YC Spread 1.7% steepener at 0.428%
BTCUSD 0.5% stronger at 64600
SP500 flat with ES Futures at 7770
DXY -0.2% lower at 99.70
Oil -1.5% weaker with CL Futures at 74.60
VIX -3.3% lower at 16
GICS Sector Spread XLB/XLE
→ Overall a risk-on session with the usual VIX lower, equities stronger behaviour. Today’s curve steepening (bull-steepening for the US, bear-flattening for the rest of DM) alongside lower oil makes sense against the backdrop of ongoing US-Iran negotiations.
Trader’s Commentary
Overall a quiet FX session, with the Kiwi the noteworthy laggard on the back of weaker employment figures. Makes sense. This is something I’d already flagged to the community, so the weakness isn’t a surprise.
What does surprise me is the notable CAD strength, which I genuinely cannot reason through. But that’s FX for you, a cumulation of speculators, asset managers, central banks, industrial companies, and everyone else. Maybe some Canadian company had to sell USD and buy back CAD to pay factory workers, who knows.
I’m bored by my USDJPY position.
It’s funny, I saw all these reports from traders about snapping up cheap JPY funding, basically calling it a funding gift, yet the recent sideways price action suggests markets are slower to re-engage with the carry short than they were the last time the MOF intervened.
We’ll see what happens. I’ll close it out tomorrow at the latest if it doesn’t move.
Best,
René Steiner
Macro Strategist